Why the price of electricity depends on the price of gas, and other questions about future bills

1,000 euros per megawatt hour (MWh). This is the amount of the wholesale price reached at the end of August by electricity in France. Faced with this devastating outbreak for household incomes and national economies, European energy ministers met on Friday, September 9, in Brussels urgently to find solutions.

Why are wholesale prices increasing so much?

An accumulation of factors has led to the explosion in the price of electricity, which affects Europe as a whole, and does not spare France.

  • economic and industrial recovery. Demand linked to the exit from the economic crisis caused by Covid-19 has been driving prices up since the end of 2021.
  • The war in Ukraine. A significant share of electricity in Europe is produced from natural gas, which leads to price coupling between gas and electricity. However, the price of the first increased with the European embargo on Russian gas, then at the beginning of September (+ 30%) with the extension, for an indefinite period, of the shutdown of the Nord Stream 1 gas pipeline.
  • In France, the state of the nuclear fleet. Between the meteorological conditions – the drought affected the rivers used to cool the reactors – and the aging of the infrastructures, which require maintenance operations, a large part of the nuclear fleet is shut down. Thus, at 1er September, only 24 of EDF’s 56 nuclear reactors were operational. However, France, usually self-sufficient and even an exporter, is also obliged to supply itself on the European electricity market, contributing to the tension on prices.
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Why are electricity prices so volatile?

Since the 1990s, the European Union (EU) has gradually opened up national electricity markets to competition in order to harmonize and liberalize the European market, and better interconnect it. The European electricity transmission network now ensures security of supply and exchanges between 35 countries.

This market is based on a European stock exchange, Epex Spot SE, on which MWh are traded, with prices that vary by country depending on supply and demand. It constitutes a speculative place which brings together producers, suppliers and traders, who buy and sell electricity (nuclear, renewable or fossil), for immediate or deferred deliveries.

However, in this wholesale market, the price is set not according to the average cost of electricity production in Europe, but based on the “marginal” production cost of the last MWh injected into the network. In the event of low demand, nuclear or renewable installations are sufficient, but when demand is high, thermal power stations are used, and the cost of electricity is then indexed to the price of gas (or coal). Added to this is a tax on CO emissions2within the framework of the European carbon market.

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Can the European Union act on prices?

Yes. The President of the European Commission, Ursula Von der Leyen, presented on Wednesday ways to reduce the energy bill:

  • capping the price of Russian gas imported by the EU, which would limit the high volatility of the price per MWh on the wholesale markets, indexed to the price of gas;
  • capping the MWh produced at 200 euros, excluding gas-fired power plants, in order to de-index the sale price of electricity from that of natural gas;
  • establish a solidarity contribution for fossil fuel companies that accrue profits;
  • redistribute the “unexpected benefits” electricity producers, which mobilize nuclear power plants, wind power, solar power or hydroelectric dams and “make massive revenues that do not reflect their production costs”to help households and businesses “vulnerable” ;
  • allow Member States to use this financial windfall to help consumers but also to invest in clean energy sources;
  • finally, the Commission aims “intelligent demand reduction”with “a mandatory objective to reduce electricity consumption during peak hours”.
Read the editorial: Energy crisis: rebuilding the European electricity market

Do the French pay for electricity at the European price?

Not completely, despite a very clear increase. ” Only a part of the kilowatt-hours is bought at the “high price” on the wholesale market”, explains to AFP Patrice Geoffron, Professor of Economics at the University of Paris Dauphine-PSL and Director of the Center for Geopolitics of Energy and Raw Materials. The rest ” corresponds to nuclear production, the cost of which is well below the level of wholesale prices”. Prices would, however, be much more contained if the nuclear fleet was able to operate at full capacity.

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Furthermore, French consumers’ bills are not directly indexed to wholesale market prices, but to tariffs regulated by the State. But he is protective. In September 2021, the Jean Castex government thus implemented a “tariff shield” limiting the rise in the downstream price to 4%.

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It goes through a double mechanism:

  • A tax reduction. The domestic tax on final electricity consumption (TICFE) was reduced from 22.50 euros per MWh to 50 cents on 1er February in order to limit the increase in the regulated tariff.
  • A reorientation of nuclear power. The State has forced EDF to increase by 20%, i.e. from 100 to 120 TWh in 2022, the volume of its nuclear production sold to its competitors at low prices by Regulated Access to Historic Nuclear Electricity. In compensation, the price invoiced for this reserved electricity rose from 42 to 46.20 euros per MWh.

By comparison, UK regulated prices are set to rise steeply, by 80% on 1er october.

In France, the crisis could fade more quickly, but depending on uncertain factors. “Our gas stock is pretty good. If we manage to relaunch nuclear power, if the weather conditions are good enough for wind power, and if the State maintains the tariff shield, this should limit the damage, but it is difficult to predict,” delays Carine Sebi, economist at Grenoble Ecole de Management.

Will the tariff shield be renewed in 2023?

Yes, but not necessarily identical. The Minister Delegate for Public Accounts, Gabriel Attal, announced at the start of the school year his renewal on 1er february. Its precise outlines will be discussed at the time of the 2023 finance bill from the end of September. “There will be an increase in energy prices in early 2023, but it will be contained and reasonable compared to this worst-case scenario,” promises the Minister of the Economy, Bruno Le Maire, in The echoes.

At stake, the question of the cost for the State. The electricity price cap measures cost, according to Bercy, 10.6 billion euros to the State for 2022 – and in total, with the gas price freeze and the discount at the pump on fuels, 24 billion euros, or the equivalent of 1% of GDP. Will it be bearable for public finances to postpone such a device identically?

Another difficulty: ensuring social equity. According to a recent analysis by INSEE, the price shield fails to reduce the gaps between social categories. Overall, it made it possible to halve the surge in energy prices, but the most modest households are more strongly affected by the effects of the price increases. In The Parisianthe Prime Minister, Elisabeth Borne, promised “specific provisions to support the most vulnerable. »

As a consumer, how can you reduce your bill?

For individuals who want to reduce the impact of price increases, various solutions exist, at different scales, timescales and costs.

Adopt the right gestures. Rising electricity prices particularly affect households that use it as a means of heating, and winter temperatures rhyme with bills that hurt. “The only solution is to change behavior, and for example go from 22°C to 20°C ambient temperature, knowing that the recommendation is 19°C”, explains Carine Sebi. Lower the thermostat by 1°C amounts to saving 7% on their heating bill. Finally, it is possible to make valuable savings by only activating your water heater at reduced time slots, and by reducing the use of certain energy-intensive equipment, such as clothes dryers.

Equip yourself well. Major household appliances (refrigerators, washing machines, dryers, etc.) consume most of their energy during use, hence the interest in replacing old models with recent models. “We must choose the most economical, even if we will not always save as much money as CO2 », recognizes Sophie Attali, vice-president of the eco-responsible buying guide Topten. Other good choices: ban halogen bulbs and aquariums, favor refrigerators without a freezer compartment or opt for a small water heater.

Invest. Doors, windows, walls… “You have to isolate first. It’s nonsense to try to heat rooms that don’t retain heat.”, recalls Sophie Attali. Many financial aids for thermal renovation exist. Another solution: opt for a more efficient heating system, such as heat pumps, which are less expensive to use and therefore economical in the long term.

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